Estimating System Reviews
As part of a regulatory oversight requirement, DCAA will periodically perform contractor estimating system reviews. The intent is to review the requirements delineated in DFARs 215.811 and 252.215-7003. DFARs 215.811 requires all DOD contractors to have adequate estimating systems, requires certain large businesses to disclose their estimating systems in writing, provides guidelines concerning the characteristics of an adequate estimating system, and provides guidance for team estimating system reviews. If a contractor is required to disclose their system, all significant parametric cost estimating techniques need to be disclosed.
It is DOD policy that contractors have estimating systems that consistently produce well supported proposals acceptable as a basis for negotiating fair and reasonable prices. Estimating systems should be consistent and integrated with a contractor's related management systems, and be subject to applicable financial control systems. To be considered adequate, an estimating system must be established, maintained, reliable, and consistently applied. It must also produce verifiable, supportable and documented cost estimates.
FAR 15.8 provides the criteria for submission of cost or pricing data. Although FAR 15.8 does not mention parametric cost estimating techniques, there are no restrictions that preclude the use of these techniques for firm business proposal submissions. FAR 15.804-6, Table 15-2, does require the offeror to submit any information reasonably required to explain the estimating process. This means that the contractor should clearly describe all parametric cost estimating techniques and provide support for the data used in those techniques.
The FAR 15.804-6, Table 15-2, also states that for material cost estimates, the contractor shall provide a consolidated summary of individual material quantities (e.g., bill of material) included in the various tasks being proposed. In some cases it is not feasible for a contractor to provide a consolidated bill of material or parametrics results in a better and more supportable estimate. For example, in the research and development phase of a program, the material requirements often times have not yet been defined, and, as a result, the preparation of a consolidated priced bill of material is often not possible. In these circumstances, parametric cost estimating techniques may provide for a reasonable basis to estimate material costs in lieu of a consolidated priced bill of material.
In any case, when a offeror uses estimating techniques other than a consolidated priced bill of material to estimate material costs, the offeror must adequately describe the techniques being used, provide sufficient support to allow for an independent evaluation, and explain why the techniques used are the best in the circumstances in order to comply with the material cost criteria included in Table 15-2.
DFARs 215.811-70 delineates attributes of an adequate estimating system. These are:
- Establishes clear responsibility for the preparation, review, and approval of cost estimates.
- Provides a written description of the organization and duties of personnel responsible for contributing to the estimating process
- Ensures that relevant personnel have sufficient training, experience and guidance
- Identifies sources of data and the estimating methods and rationale used in developing cost estimates.
- Provides for appropriate supervision
- Provides for consistent application of estimating techniques.
- Provides for detection and timely correction of errors.
- Protects against cost duplication and omissions.
- Provides for the use of historical experience, including vendor pricing information where appropriate.
- Requires use of appropriate analytical methods.
- Integrates information available from other management systems as appropriate.
- Requires management review [of the estimating system]
- Provides for internal review of and accountability for the adequacy of the estimating system, including the comparison of projected results to actual results and an analysis of any differences.
- Provides procedures to update cost estimates in a timely manner.
- Addresses responsibility for review and analysis of subcontract prices.
No well supported and documented parametric estimating system should be threatened by any audit requirements, FAR or DFAR characteristics, or any other compliance (Truth in Negotiation Act) issue. A well calibrated and validated parametric estimating system will be compliant in all respects. The DFARs goes on to list indicators of or conditions that may cause significant estimating deficiencies (from 215.811-77). Three in particular stand out:
- Failure to ensure that relevant historical experience is available to and utilized by cost estimators, as appropriate.
- Consistent absence of analytical support for significant proposed cost amounts.
- Excessive reliance on individual personal judgment where historical experience or commonly used standards are available.
The DFARs emphasis on historical experience is particularly satisfied by well supported parametric systems. After effective calibration activities, parametric estimates are developed that are auditable, compliant with regulations, and suitable for the negotiation of fair and reasonable prices between government and contractor.